Levy funding for producer boards – the final hurdle

Federated Farmers' Meat and Wool Section Council Meeting

Mr Chairman, ladies and gentlemen, parliamentary colleagues...

Thank you for the opportunity to speak here today.

Introduction
The primary sector has dominated the New Zealand economy and it continues to do so:
- It comprises 15% of GDP

- It accounts for 16% of employment, and

- It earns over 50% of export income.

While it has been fashionable to talk of growth and export opportunities beyond agriculture, the reality is that agriculture remains a key component of the economy and it dominates the tradeable sector.

Real agricultural commodity prices
Having said this, the commodity focus largely remains and the sector has been facing constantly declining prices for several decades now. For New Zealand the only path to prosperity is through change and adaptation

The performance of the rural sector is also of concern for the Government, not only because of its importance to the economy, but also because of the unexploited potential it has to drive the economy forward.

New Zealand's economy is biologically based, and enormous immediate opportunities exist to build on this base. The economy has a depth of experience and a level of expertise in biological industries that make this sector an obvious choice for focusing growth towards a stronger knowledge-based economy.

It is this understanding of the importance of adding value that has contributed to the development of the policies outlined in the recently announced "Bright Future: Five Steps Ahead" initiatives.

National's economic objective is the same as yours, to increase farmer income and profit. Because of the work National has done over the last nine years, the focus of rural issues has shifted away from high inflation, high interest rates, health and employment.

Farmers are keen to see the economy remain stable. Farmers don't want progressive reforms like the Employment Contracts Act or the changes to accident insurance undone. Farmers don't want to see their costs rise and their livelihoods destroyed. A Labour Government is the last thing rural New Zealand needs or wants.

What National has done for rural NZ Since 1990 when National became the Government, we have turned the business around from a predicted loss of $5 billion for 1993 to returning a surplus each year or the last 6 years. In addition we have paid down a crippling public overseas debt to a net zero.

We have halved the net Crown debt from 52% of GDP to less than 25% today. We have cut taxes by over $100 a week for the average household and tamed inflation. New Zealand farmers, businesses and homeowners now enjoy the lowest interest rates in 30 years. We have reduced the costs of many key business and domestic inputs by reducing tariffs and deregulation.

We did all this by concentrating on the basics - sticking to the knitting.

New Zealand is a trading nation. Our prosperity is dependent on the performance of our economy and our export industries and it has been the National Government's job to make New Zealand one of the most competitive investment and business environments in the world.

The ECA, the elimination of stamp duty, shipping deregulation, fuel price competition, tariff reductions, economic stability, low interest rates and parallel importing are all things which help farmers, New Zealand's export earners, to keep an ever increasing share of the pie that they create.

To achieve this, National has set the framework which has allowed industry the freedom to perform within that environment.

This brings me to today's topic "Levy Funding for Producer Boards - The Final Hurdle." Producer boards currently depend on compulsory levies on farmers.

Compulsory Funding
Effectively a compulsory levy is where the Government delegates its power to tax to a private organisation. That power is coercive. By using this power, an organisation can take money from people to fund its activities, even from those who would prefer to spend their money on something else, such as reducing farm debt.
In 1998, levies raised by the four non-trading boards (Meat, Wool, Pork, and Game) amounted to $76 million. Currently:

- Levy payers cannot vote on whether there is a levy, or the amount of any such levy.

- Levy payer influence is only indirect, mainly through board elections and through non-binding remits at AGMs.

- Levies apply for as long as the boards determine; and

- Levies can be used for any activity consistent with the boards' current statutory objectives, including commercial ventures and brand promotion.

Key problems
The key problems with the current regime are:

- the current accountability mechanisms are inadequate;

- the scope of spending of levy income by the boards is relatively unconstrained; and

- current spending is likely to be crowding-out other commercial activities.

The free rider problem
National is a strong believer in letting individuals choose how, where and when to invest their money. It is widely accepted that direct contact between buyers and sellers will usually:

- promote lower production costs of goods and services;

- it will direct resources to higher value uses; and

- promote best practice techniques through ongoing innovation.

However, we also recognise that, in certain circumstances, the market sometimes fails to deliver. In certain circumstances there may be a role for compulsory levies for industry good activities.

In these circumstances, the activity (‘industry good') may be under provided, or not provided at all, and if provided voluntarily, some may benefit without paying (free riders).

An example might be non-proprietary research, such as eradicating the threat of TB from possums.

The Risks with a Compulsory Levy
But even if a free rider problem exists, it doesn't automatically follow that there should be a levy. A number of risks need to be considered. They include:

- the extent to which levy payers will not benefit by as much as the money they give up in levies.

For example, the average sheep farmer pays approximately $3,300 in levies. Over a 10 year period, had this money been applied to reducing on-farm debt, the farmer would have been able to reduce that debt by over $50,000. Only if the value to the farmer of the levy spend exceeded this amount, is the levy worthwhile.

- It is all too easy for organisations funded by taxes or levy income to make poor investment decisions.

This is because:

- it is easy to treat levy income as ‘free money'. Unlike a normal company, the cost of the Board's poor investment decisions are passed on to levy payers, rather than to the organisation as would happen with a normal company; and

- in the absence of profit and loss to provide strong incentives to perform, it is the role of payers to sanction poor performance. They are only able to do this if they have very good information on the Board's performance, and an effective mechanism through which to apply sanctions for poor performance. This is not currently the case.

The Government needs to safeguard those groups not adequately represented in the levy-raising process. These groups could include consumers, participants in related industry sectors, new entrants, and New Zealand's broader economic interests.

However, with any Government intervention there will be accompanying costs to Government (implementation, monitoring) and risks for example, from overly complex regulations, and adverse impacts on market behaviour.

Minimising these Risks

Like farmers the Government is interested in increasing rural incomes. We are therefore vitally interested in developing a levy framework that will improve investment returns and therefore profit and income.

Levy payer referendum

Before a levy is imposed, it is important that the levy organisation demonstrate that it has clear and decisive support from potential levy payers to, among other things:

- the proposed basis of the levy;
- the amount of the levy; and
- the projects levy income is to be spent on.

In this sense, a referendum acts as a substitute for the role prices play in a normal market.

Consultation and information disclosure
For a referendum to be effective, farmers must be fully informed on the levy proposal. To achieve this it is important that the levying organisation provides key information, including cost benefit analysis, and consults appropriate parties in developing the levy proposal.

The Government over the last year has drafted a provisional Compulsory Levies Bill provided for the Commerce Commission to assess whether the activities the boards propose to fund comply with the ‘industry good' criteria of the Bill. The boards however requested that this instead be done by the Minister.
Where did we get to with the Boards?

It was agreed that:

- Levy income should only be spent on ‘industry goods'.
- A cost benefit analysis should be undertaken for all levy expenditure, and provided to levy payers.
- A new referendum on any levy should be held within 5 years of it being struck.

Disagreement occurred in respect to three key issues:

- The definition of ‘industry good', with the Boards favouring a wider definition, which included commercial activities;
- The mechanism for ensuring levy income was spent only on industry goods, with some Boards favouring no third party oversight, with others favouring the Minister over the Government's preference to use the Commerce Commission; and
- The level of levy payer support required to obtain or continue a levy. Some boards considered the level of support proposed by Government (30 % of all levy payers) could be achieved by their industry, other boards did not.

Where to from here?

Time has not allowed the introduction of a Compulsory Levies Bill into Parliament this term. Following the election, the Government will work with the boards to develop compulsory levies legislation which:

- provides adequate accountability of levy organisations to farmers;

- limits levy spending to ‘industry goods'; and

- generates income gains for farmers.

I want to commend the Meat and Wool Section of Federated Farmers for their leadership in the ongoing producer board debate.

I am pleased with he progress being made and that there is now a far greater understanding on the need to question and challenge the costs and roles of our producer boards. They represent a cost for farmers which has to be shown to be of benefit to farmers and to be regularly reviewed.